The following correction was printed in the Guardian's Corrections and clarifications column, Thursday June 14 2007

The attorney general has asked us to clarify his position over the decision to conceal BAE payments from the OECD anti-bribery working group. He states that it was not his decision, but that of the head of the Serious Fraud Office.

British investigators were ordered by the attorney-general Lord Goldsmith to conceal from international anti-bribery watchdogs the existence of payments totalling more than £1bn to a Saudi prince, the Guardian can disclose.

The money was paid into bank accounts controlled by Prince Bandar for his role in setting up BAE Systems with Britain's biggest ever arms deal. Details of the transfers to accounts in the US were discovered by officers from the Serious Fraud Office during its long-running investigation into BAE. But its inquiry was halted suddenly last December.

The Guardian has established that the attorney-general warned colleagues last year that "government complicity" in the payment of the sums was in danger of being revealed if the SFO probe was allowed to continue.

The abandonment of the inquiry caused an outcry which provoked the world's anti-corruption watchdog, the OECD, to launch its own investigation into the circumstances behind the decision.

But when OECD representatives sought to learn more about the background to the move at private meetings in January and March they were not given full disclosure by British officials, according to sources.

One insider with knowledge of the discussions said :"When the British officials gave their briefing they gave some details of the allegations, but it now transpires, not all of them."

A source close to the OECD added: "We suspected that the British were holding some secret back."

Sources close to the US justice department, whose members help to police the international anti-corruption treaty to which Britain is a signatory, confirmed that UK officials had not disclosed to the group that huge payments had gone to the prince in connection with the al-Yamamah arms deal.

In those confidential briefings at the OECD headquarters in Paris earlier this year, the UK said "national security" reasons were behind the decision to halt the SFO investigation into the case.

They claimed the SFO probe focused largely on old allegations of a slush fund operated by the BAE to provide treats for junior Saudi officials. Last night, a spokesman for Lord Goldsmith said full evidence had not been given to international panel members of the OECD anti-bribery working party at their meetings in order to protect "national security". He said: "The risk of causing such damage to national security had a bearing on the information voluntarily provided to the OECD".

He added: "We have not revealed information which could itself jeopardise our national security. For these purposes the OECD was effectively a public forum, as is illustrated by the fact that you claim to know what [the government] told them."

The Guardian's disclosure of British government complicity in the alleged payment of £1bn to Prince Bandar caused international concern yesterday, with Tony Blair taking a bullish position when questioned at the G8.

Standing beside George Bush, a close family friend of former US ambassador Prince Bandar, Mr Blair said it would have "wrecked" the relationship with Saudi Arabia if he had allowed investigations to go on. "This investigation, if it had gone ahead, would have involved the most serious allegations and investigation being made of the Saudi royal family," he said.

"My job is to give advice as to whether that is a sensible thing in circumstances where I don't believe the investigation would have led to anywhere except to the complete wreckage of a vital interest to our country."

Neither Mr Blair nor the Ministry of Defence made any attempt to deny the allegations revealed by the Guardian.

Prince Bandar last night issued a statement through his lawyers categorically denying that payments made to Riggs Bank in Washington "represented improper secret commissions or 'backhanders'".

He said the payments were made to Saudi ministry of defence and aviation (MODA) accounts of which he was a signatory. "Any monies paid out of those accounts were exclusively for purposes approved by MODA."

He said the accounts were regularly audited by the Saudi ministry of finance and BAE payments were "pursuant to the al-Yamamah contracts". He added: "At no stage have MODA or the Saudi Arabian ministry of finance identified any irregularities in the conduct of the accounts."

BAE last night issued a statement claiming there was full government complicity in any payments it had made with regard to the al-Yamamah deal, which was signed in 1985. The company said transactions were made with the "express approval" of the British government.

"All such payments made under those agreements were made with the express approval of both the Saudi and UK governments".

The fallout from yesterday's allegations may affect BAE's planned expansion in the US.

According to a source in Washington, BAE's $4.1bn (£2bn) proposed takeover of a major US defence company could be in jeopardy because of the disclosures.

The source, assessing the damage yesterday, predicted it will also be harder for BAE to pursue other plans for moves into the US defence market.

BAE could come under scrutiny from a number of US investigatory bodies, including the treasury, the justice department and congressional committees.